Timing is Crucial With Tax Cuts.

CONGRESS is preparing to grapple with one of the knottier issues surrounding President George W. Bush's proposed tax cut: how to get some of the money into the hands of consumers before the economy begins to recover.

It isn't as easy as it sounds. Even if part of the tax cut is made retroactive, unless lawmakers come up with a quick-refund scheme, U.S. taxpayers won't actually reap the benefits until a year from now, either as refunds or in reduced tax liability.

That would be too late to provide the kind of economic stimulus that lawmakers -- and Bush -- say is needed to help cushion the current slowdown. If the economy rebounds early next year, the added stimulus could intensify inflation pressures.

The issue is important because the Senate is slated to begin work on the tax bill soon, and the question of how to speed the impact of a tax cut is high on its agenda. Lawmakers want the cut to serve partly as an anti-recession device, and Bush agrees.

There's considerable dispute both over how to get the money out to taxpayers quickly and whether it would really do much good in spurring consumers to spend more. Economists say every day's delay increases the risk that it might backfire.

"This episode is a classic example," said Joel Slemrod, a University of Michigan tax policy expert. Three months after Bush proposed the cut, "we still aren't certain what kind of tax cut it will be and how it would be delivered."

Even if Congress completes work on the legislation by July 4--as lawmakers are hoping -- the cuts aren't likely to affect consumers before sometime in mid-September or October.

The dilemma stems partly from the mismatch ir timing inherent in the president's plan. Bush initially portrayed his tax cut as a long-run economic elixir. When the slowdown began, he abruptly shifted and sold it as a quick anti-recession pill.

Under Bush's original plan, the cuts wouldn't have begun to take effect in earnest until 2006. But Democrats seized the moment by demanding that a portion of the cut be made retroactive and sent out as a tax rebate.

Quick relief

Some lawmakers want to speed the benefits by ordering employers to reduce withholding rates for their workers. Others want simply to send rebate checks directly to taxpayers.

The difficulty is, the record of such schemes isn't encouraging. Some have proven to be fiscal flops, while others have backfired and ended up exacerbating inflation pressures.

While having the Treasury send out rebate checks may seem like a simple solution, experts say there's a wide opportunity for error. Computers can easily miss senior citizens and the poor, who often have no taxable income.

Ordering companies to reduce the amount that they withhold from workers' paychecks also is deceptively simple. Analysts say small businesses just aren't equipped to make such changes quickly.

Reducing withholding rates contains another danger as well: Since the permanent tax cuts that Bush is proposing wouldn't take effect fully until 2006, withholding rates that are lowered in 2001 would automatically go up again in 2002.

Finally, economists warn, there's no guarantee taxpayers would actually spend their rebates. Some might decide to save the money. Others might react cautiously, figuring the windfall was temporary and wasn't likely to last.

Studies show that the fiscal impact of such measures has been far more modest than their sponsors had hoped. Consumers spend far more fulsomely when the tax cuts are permanent.

"Over a one-year planning horizon, a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equal magnitude," Alan Blinder, a former Federal Reserve governor, wrote in a 1981 study.

"A rebate," he added, "is estimated to have only about 38 percent of the impact.

That's precisely the point that Bush himself had been making before last December, when he and Vice President Dick Cheney snared themselves in a trap by suddenly touting the tax-cut plan as an anti-recession measure.

There's a second part to such findings, however, that could prove even more unsettling: while consumers may not open their wallets wider during the year that the rebate is enacted, they often do step up their spending in the second year.

That means that the economy is likely to feel the extra spur from the tax rebate just at the time that it is beginning to recover -- meaning that the rebate most likely would exacerbate inflation pressures just when policy makers least want it.

Art Pine is a columnist for Bloomberg News.